The U.S. Securities and Exchange Commission has settled charges against Merrill Lynch, Pierce, Fenner & Smith Inc. over allegations that it let traders at other firms listen into its squawk boxes, the regulator said Wednesday.

The SEC charged the firm with securities laws violations for having inadequate policies and procedures for controlling access to institutional customer order flow. Specifically, it alleged that from 2002 to 2004, several Merrill Lynch retail brokers at three branch offices permitted day traders at other firms to listen to confidential information on large unexecuted block orders of Merrill Lynch’s institutional customers. The brokers put their telephones next to the squawk boxes and let the day traders listen to the squawk box, often for the entire trading day, the regulator said. The day traders used the broadcasts to trade ahead of the orders placed by Merrill Lynch’s customers, it added.

Without admitting or denying the SEC’s allegations, Merrill Lynch has agreed to a censure, to cease and desist from committing or causing violations, and to pay a US$7 million penalty. Merrill Lynch also agreed to various undertakings aimed at protecting customer order information transmitted on the squawk boxes and related technologies.

“It is critically important that registered broker-dealers and investment advisers protect institutional order information and control its flow,” said Scott Friestad, deputy director of the Division of Enforcement. “Otherwise, unscrupulous people may misuse the information to the detriment of investors.”

IE